BUSINESS WATCH

Dominoes in a grim game of debt

Peter C. Newman March 16 1987
BUSINESS WATCH

Dominoes in a grim game of debt

Peter C. Newman March 16 1987

Dominoes in a grim game of debt

BUSINESS WATCH

Peter C. Newman

Canadian bankers, dismissing Brazil’s decision to suspend indefinitely the interest payments on its $90.4-billion bank debt as just another temporary blip on their balance sheets, have not read their history.

It happened once before.

On Aug. 30, 1931, the government of Brazil startled already depressed world financial markets by announcing a “partial moratorium” on foreign debt payments. Soon, similar “moratoriums” became national policies of most Central American nations, so that within a year only Argentina, Venezuela and the Dominican Republic were meeting their obligations. In Europe, the Brazilian pretext was also used by Hungary, Yugoslavia, Romania, Poland and Bulgaria to go into default, and Germany, its confidence bolstered by the fanatical Adolf Hitler, later followed.

It was this domino effect of national bankruptcies that proved to be a pivotal influence in pushing the financial world—already crippled by the 1929 stock market crash—into a full-scale depression.

History, of course, never repeats itself exactly, but the circumstances were, if anything, more favorable in the 1930s than they are today. For one thing, the totals were much smaller then—$4 billion in total defaults by the end of 1933. And most of the South American loans were, in fact, never repaid. Mexico, for example, paid out only about $65 million on its $665-million debt when it re-entered the international financial markets in 1945. But in a 1981 prospectus applying for a $65-million loan for Pemex, Mexico’s state-owned oil company, the government claimed that “full debt service has been paid when due upon all the external debt issued by the federal government of Mexico since the adoption of the constitution of 1917.” Unlike the 1930s crisis, which touched individuals more than banks, the current showdown has to do entirely with financial institutions. On a proportionate basis, Canada’s six largest banks face obligations from 32 underdeveloped countries larger than the debts owed banks in the United States—a total for potential default that exceeds $25 billion. They have put aside in their reserve accounts a paltry $3 billion to cover those contingencies, although other standby funds would

presumably be available, and of course the assets of the six Canadian banks total a solid $411.3 billion. The Canadian banking system may be under siege, but it is not in danger.

To the current grim picture must be added the possibility of the impending collapse of Calgary’s Dome Petroleum, which owes five Canadian banks more than $3 billion. In the first nine months of the past fiscal year, which ended Dec. 31, 1986, it lost $693 million, and

circumstances have not improved since then. Some Swiss note holders have taken Dome to court to recover a total of $103,000, and the Bayerische Landesbank of West Germany has placed a summer deadline on getting a $400,000 Dome loan paid off. Unless a magic escape hatch is found, that could trigger demands for the repayment of the company’s entire $6.3-billion debt. That, in turn, would lead to the collapse of the whole Dome of cards.

Adding together only the Dome and

Third World obligations produces the following scorecard for Canada’s major banks of dubious debts outstanding: Bank of Montreal, $6.8 billion; Royal Bank, $6 billion; Canadian Imperial Bank of Commerce, $4.3 billion; Scotiabank, $4.9 billion; Toronto-Dominion, $3.8 billion; National, $2.5 billion. Some of those loans are secured, and, as of this writing, no country except Brazil has announced its intention to suspend interest payments, so that these are potential rather than real liabilities. At the same time, the Canadian banks are already carrying about $10 billion in bad loans on their books from other sources, mainly Alberta’s Oil Patch.

Other South and Central American countries are sure to follow Brazil’s example. Mexico, with its $137 billion in foreign debts (including $7.1 billion to Canadian banks), has already once threatened to stop its interest payments; that crisis was only averted when the International Monetary Fund arranged for $16 billion in emergency bridging. This week the Mexican government will be back asking for $10.2 billion more. Argentina is demanding that $39.9 billion of its loans be rewritten, while Venezuela and Chile are known to have their rescheduling request in the works.

Paradoxically, Brazil’s economy is among the most prosperous in the region. Its gross domestic product last year was $280 billion and trade is healthy, although inflation is expected to reach a ruinous 800 per cent. The first civilian leader after more than two decades of military rule, President José Sarney faces insurmountable odds. He is attempting to carve out the kind of popular constituency required to make democracy function—and he cannot do that with the austerity measures being demanded by his international creditors.

The national unions are threatening strikes unless they receive hefty pay increases, and industrialists are openly ignoring the government’s pricing policies. Sarney’s democratically elected assembly is filled with members of parliament clamoring for more spending on behalf of their underprivileged constituents.

When the Brazilian president announced the current moratorium on debt repayment, he concluded his speech with a desperate invocation: “May God help us .... ”

Amen.